How many times have you fumbled in the dark, looking for the on-off switch?
Do you do the same with your investment approach?
A high percentage of investors AND advisors I’ve met over 34 years in the business perpetually seek the same holy grail: the on-off switch for investing.
Meaning, what is the one event, the one signal, the one indicator, the one measure… the one “something” to tell us to get in OR get out of the market. They’ve built an entire cable TV channel in search of that magical on-off switch (CNBC).
I hate to break it to you. There is no on-off switch.
Back in the mid-eighties, I worked “in the bullpen.” The bullpen was where baby brokers got their start, smiling and dialing. But it was also where older brokers – who weren’t making their numbers – went to fade away.
I sat near an older guy in the bullpen who used to have lots of clever lines. “Don’t confuse brilliance with a bull market,” he’d yell into the phone. Another was “there is always free cheese in a mousetrap.” Likewise, “trees don’t grow to the sky” and “when you get a hunch, bet a bunch!”
But one that really stuck with me was “they don’t ring a bell at the top!”
He’d pivot when markets slumped and say, “you know they don’t ring a bell at the bottom, right?”
But that IS what people seek. They’re looking for one fool-proof signal to act as an on-off switch. A bell that clangs at market tops and gongs at market bottoms.
The on-off switch does not exist.
We use a lot of indicators in our work. We started with a small list of handy tools and continually added some over time. These indicators are all very good and battle-tested. Some indicators are short term, some intermediate. Some are long-term indicators. They are accurate much of the time.
And very importantly, we trust these indicators.
Do we rely on the indicators as to stand alone as go/no-go signals? No. Taken individually, these indicators cannot serve as on-off switches. One doesn’t out-weigh the others. That’s why we take all the indicators together and come up with a body of evidence. And the message changes constantly. And these indicators help to shape only one portion of your game plan (the tactical side).
The tactical side of your portfolio should never represent 100% of your investments. Being tactical with all your money is not a plan. Going all-in, all-out with 100% of your investments is a recipe for disaster. In thirty-four years of doing this, there’s been precisely one time where that worked. Some investors should be fine without any tactical side to their investment plans.
And let’s also address something else. If there is money which an individual needs, will be drawing down, or plans to use over the next two years; those funds should not be at risk in the market. And if some investors hold a very low tolerance for risk, money needed in the next three (or possibly four?) years might be better off not at risk.
Devising or relying on a single indicator as an on-off switch is a terrible way to invest. And if you think it’s bad for individuals, using an on-off switch (indicator) can be suicidal for an investment advisor. More than anything, it’s not a plan. As we’ve discussed in recent podcasts at Mullooly Asset Management, going “100% to cash” actually requires two decisions. The first decision is making the decision to get out of stocks. The second decision is how or when to re-enter.
It’s important to have market tools to trust in and rely on, especially when our visibility is low. For as much as we all want a magic on-off switch, it doesn’t exist.